One year later, NAFTA lives on

'It's always more complicated ... than you think'

Reuters
Mexico’s Economy Minister Ildefonso Guajardo addresses the media, with Canada’s Foreign Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer, at the close of the third round of NAFTA talks involving the United States, Mexico and Canada in Ottawa, Ontario, in September.

Bloomberg News

President Donald Trump has made no secret that he wanted the North American Free Trade Agreement gone.

But a year of on-again, off-again negotiations without a clear view of an endgame has demonstrated the pact’s staying power.

The survival of NAFTA was hardly a given exactly a year ago, when negotiators from the United States, Canada and Mexico gathered at a hotel in Washington, D.C.

Their task was to start hammering out a fast update to the 24-year-old pact, which governs $1.2 trillion in trade.

Trump wasn’t backing down from his threat to withdraw from the deal.

Still, heading into the opening round of talks, business leaders were hopeful the United States would push for a modest revamp that would bring the deal into the 21st century on issues such as digital commerce and intellectual property.

Commerce Secretary Wilbur Ross said the United States wanted a deal by January, suggesting the administration might settle for a quick makeover.

That likely would have satisfied Mexico and Canada, both of which supported the idea of a tariff-free continent.

But when U.S. Trade Representative Robert Lighthizer took the stage on the first day of negotiations, it was clear he wasn’t interested in a “mere tweaking.”

The veteran trade lawyer from northern Ohio proclaimed that NAFTA had failed for “countless” Americans, costing manufacturing jobs. The United States would be looking for a host of major changes — foremost among them, a reduction in America’s trade deficit.

Within weeks, Lighthizer unveiled a series of demands designed to “rebalance” trade on the continent, including a hike in the amount of regional content required in cars, and a “sunset clause” that would automatically terminate the deal in five years unless the nations signed back on.

Mexico and Canada swiftly rejected the ideas, with some commentators suggesting they were “poison pills” intended to kill the talks.

Managed trade

But 12 months after Lighthizer put his counterparts on notice, the talks continue. The United States and Mexico are pushing for a breakthrough on cars, hoping that could pave the way for a deal before Mexico’s new president takes office Dec. 1.

However, the nightmare scenario for companies — a U.S. withdrawal — hasn’t come to pass.

“The lesson is that it’s always more complicated and it takes longer than you think,” said William Reinsch, a senior adviser at the Center for Strategic and International Studies who served as a senior trade official during the Clinton administration.

“You can’t just by fiat suddenly decree that we’re going to go back to 1955 and everything will be made here.”

Industry groups were swift to denounce the U.S. proposals that would scale NAFTA back. The Business Roundtable, which represents the CEOs of many of America’s biggest companies, warned in November that withdrawing from or weakening NAFTA would threaten jobs and hand opportunities to competing nations.

But things could have been worse for CEOs.

The Trump administration didn’t introduce proposals more directly aimed at restricting imports in certain sectors, such as tariffs or quotas on specific products, said Wendy Cutler, managing director at the Asia Society Policy Institute and a former U.S. trade negotiator.

“I personally thought that, given their focus on the trade deficit, they would put forward proposals that were much more like managed trade,” said Cutler, referring to the “managed-trade” approach used by the Reagan administration to restrict imports.

Trump still may effectively take that path. He’s imposed tariffs on steel and aluminum, and is threatening to do so on imported cars and car parts — a move that could upend the North American supply chains of companies from General Motors to Toyota.

Canada and Mexico are holding the line on their most sensitive issues.

Mexico rejects the idea of a sunset clause. Canada wants to maintain the settlement-dispute systems in the agreement, and doesn’t want to bow to U.S. demands to dismantle its dairy sector.

Congress also has caused headaches for the administration. With midterm elections looming in November, lawmakers in Trump’s own Republican Party have warned that a protectionist turn would hurt businesses and consumers, including in states that were key to his 2016 victory.

In a letter in May, senators including John Cornyn of Texas, the second highest-ranking Republican in the upper chamber, warned Trump not to try a “take-it-or-leave-it” approach with lawmakers.

“You’re starting to see that, in the part of America that Republicans hope to win, the mood is unsettled on the value of a tariff war,” said Derek Burney, a former Canadian ambassador to the United States.

Momentum

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It appears the three sides came close to an agreement in May. Canadian Prime Minister Justin Trudeau said the countries were approaching a “final deal-making moment,” when the United States canceled a meeting with Trump after Canada refused to accept a sunset clause.

Momentum is building again, driven by the U.S.-Mexico talks. Incoming President Andres Manuel Lopez Obrador has signaled he would prefer the current Mexican government sign the deal before he takes office in December.

The Trump administration’s recent rapport with Mexico has been another unexpected twist. President Enrique Pena Nieto called off a visit to the White House in February, after a tense phone call in which Trump repeated his demand that Mexico pay for a border wall.

“I’m mildly surprised that they’re still talking one year later,” said Eric Farnsworth, vice president of the Council of the Americas, a group representing U.S. businesses.

“It shows the importance of NAFTA and the U.S. relationship to Mexico, and that’s fundamental.”

Even if the three countries reach a deal this year, there’s no guarantee U.S. lawmakers will pass it.

It’s almost certainly too late to get a deal through this Congress, and Democrats have a chance of winning the House of Representatives in November, meaning Trump would have to get members of the opposing party on side.

Then there’s the threat of withdrawal, which probably will loom as long as Trump is president and the U.S. trade deficit continues to grow.

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The goods trade gap with Mexico was $71 billion last year. The proposed changes to NAFTA, even including tougher content rules for car, are unlikely to significantly reduce the deficit, said Cutler.

“For the people outside the room, the year probably seems like it’s flown by,” she said. “For the negotiators, I assume it feels like 10 years.”

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